Airline Stock Gains Mask Big Risks

BOSTON (TheStreet) -- Airline stocks have rallied in the past month, with US Airways(LCC) and UAL(UAUA) soaring more than 65%. Hedge fund manager David Tepper was prescient enough to initiate positions in both stocks, along with Delta Air Lines(DAL), last quarter.

Tepper's Appaloosa Management buys down-and-out companies, a strategy that doubled the value of its four funds last year. While his $87 million bet on airlines is paying off so far, a jaunt into the world of air transportation offers more risk than reward.

In 2009, the airline industry suffered its worst year in history as consumers curtailed travel and companies shipped fewer goods, according to the International Air Transport Association. The trade group has been more optimistic about 2010, cutting its loss forecast by almost half to $2.8 billion.

Analysts are bullish on airline stocks. Of nine analysts covering UAL, eight advise purchasing its shares and one recommends holding them. UBS(UBS) and Hudson Securities offer the loftiest price target, expecting the stock to rise 52% to $30. Similarly, nine, or 82%, of researchers following Delta suggest purchasing its stock. Just one suggests holding it. Barclays projects a $19 share price, implying that a 46% upside remains. The outlook on US Airways is mixed, with five firms rating its stock "buy" and four rating it "hold."

Tepper is known for making big wagers on shaky companies, but mutual funds also have chips on the table. Fidelity Investments owns 14% of Delta and Wellington Management controls 11%. Janus Capital(JNS) holds 12% of UAL's outstanding shares.

Long Island-based Renaissance Technologies, a quantitative hedge fund founded by mathematician Jim Simons, reshuffled airline bets last quarter. Renaissance's portfolio holds thousands of equities and automates trading. It reduced its Delta position by 42% to 4.4 million shares and cut its JetBlue(JBLU) stock by 18%. It enlarged its UAL holdings by 30% to more than 4 million shares. Its preference for UAL proved lucrative. The stock has surged 55% this year, besting Delta's 15% jump and JetBlue's 0.7% gain.

Though institutional money is boarding airline stocks, it's imprudent for individual investors to follow suit. Domestic carriers have a history of mismanagement and bear anomalous risks. United sought bankruptcy protection in 2002 and didn't emerge until 2006. US Airways filed for bankruptcy twice between 2001 and 2004.